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Speaker 1: On Bloomberg Television and Radio. I am Shanallie Bassik. Joining

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Speaker 1: us now is Bloomberg's Michael McKee and Chicago Fed President

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Speaker 1: Austin Goolesby. Mike Geta started.

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Speaker 2: Thank you chanelling, and thank you to everybody who is

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Speaker 2: watching us around the world, including Austin Goolsby joining us

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Speaker 2: from Chicago. Thank you very much, mister President. Hiring drop precipitously,

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Speaker 2: the unemployment rate shoots up more than anticipated. Everyone wants

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Speaker 2: to know, did the Fed make a mistake by not

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Speaker 2: cutting rates on Wednesday?

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Speaker 3: Well, look, you know, I'm not going to get myself

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Speaker 3: in trouble and talk about what people's thinking are from

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Speaker 3: the meeting. You're going to have to wait for the

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Speaker 3: transcript to come out to see what was on people's mind.

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Speaker 3: I've been saying to you for a long time and

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Speaker 3: publicly that we'd never want to overreact to any one

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Speaker 3: month's numbers. And if you back up to the last

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Speaker 3: half of twenty twenty three, you know that the market

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Speaker 3: said maybe there will be seven cuts for the year,

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Speaker 3: and then when a month would come in, then that

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Speaker 3: seven would drop to three. Then there was a group

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Speaker 3: saying maybe there will be an increase in rates. The

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Speaker 3: job of the central bank is to figure out the

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Speaker 3: through line and to move in a steady way. I've

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Speaker 3: been warning that we are tight. We are restrictive. The

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Speaker 3: real Fed funds rate is as high as it's been

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Speaker 3: in decades, and as inflation falls, that gets tighter. If

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Speaker 3: we stay restrictive for too long, we're going to have

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Speaker 3: to think about the employment side of the mandate. And

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Speaker 3: if you look here, if you take this, if you

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Speaker 3: take this summary the statement of economic projections in the SAP,

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Speaker 3: the neutral rate of inflation, the long term rate of inflation,

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Speaker 3: and unemployment. Say that people think full employment is about

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Speaker 3: four point one percent. So if unemployment is going to

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Speaker 3: go up higher than the neutral rate, that is exactly

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Speaker 3: the kind of pinching on the other side of the

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Speaker 3: mandate that the law says the Fed has to think

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Speaker 3: about and respond to.

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Speaker 2: Well, you've been talking about a rate cut, yet you

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Speaker 2: voted to keep rates unchanged. Why did you do that?

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Speaker 2: And now do you think maybe you are behind the curve?

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Speaker 3: Well, look like I say, I'm not going to get

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Speaker 3: into talking about the secret discussion. You got to wait

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Speaker 3: for the minutes and the transcript to come out. I

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Speaker 3: was a seat filler at the OSCARS that that's really

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Speaker 3: Cleveland's seat. I was there for one meeting. The committee

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Speaker 3: acts on the through line of the data, and the

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Speaker 3: through line of the data, you should not change what

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Speaker 3: you think. The through line is based on one month's

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Speaker 3: number and the overall. You know that I believe that

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Speaker 3: we are restrictive. I think that I've been saying for

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Speaker 3: months that what we wanted to see was improvement on

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Speaker 3: inflation and especially improvement in the components like housing and services.

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Speaker 3: And we've been seeing that, and that the longer we

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Speaker 3: were restrictive, we're going to have to start thinking about

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Speaker 3: the employment side of the MANDID.

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Speaker 2: Well, you've heard what the banks, economists and traders are

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Speaker 2: saying today. Should the next move in September be a

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Speaker 2: fifty basis point cut? And what do you think about

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Speaker 2: JP Morgan proposing from a risk management perspective, there's a

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Speaker 2: strong case to act before September eighteenth.

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Speaker 3: Look, Paul Volger, my old mentor and friend, you saw

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Speaker 3: is our job is to act and their job is

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Speaker 3: to react. And let's not get the order mixed up

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Speaker 3: on that. I fully understand why markets want to jump

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Speaker 3: if they get one scrap of information and they see

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Speaker 3: one thing, they want to conclude a trend out of

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Speaker 3: one data point, and I would just caution us. If

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Speaker 3: we had acted at the end of twenty twenty three

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Speaker 3: based on a couple of observations, then the same people

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Speaker 3: would have said, ah, but look, inflation went back up

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Speaker 3: in the first quarter, so that was a mistake. I

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Speaker 3: think the most important thing is to look at the

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Speaker 3: through line. What will determine the action is if we

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Speaker 3: don't want to tie our hands now, we're going to

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Speaker 3: get a lot of information between now and the next meeting,

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Speaker 3: and what will determine the size or if there is

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Speaker 3: action at all, will be the conditions, And that's the

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Speaker 3: way it should be. That's as I always say the

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Speaker 3: data dogs, there's a time for walking, there's a time

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Speaker 3: for sniffing. The sniffing time is when there's a lot

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Speaker 3: of uncertainty and you don't know what's what. Once you

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Speaker 3: get the through line, that's the time for walking.

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Speaker 1: What exactly would it take to see a cut before

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Speaker 1: that September meeting.

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Speaker 3: I'm not going to get in a speculative bit about that.

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Speaker 3: The FMC acts in a consensus manner. We have deliberation

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Speaker 3: and debate, and we vote on things, and I hope

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Speaker 3: I try to bring the through line mentality of you

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Speaker 3: don't take one month's number, look at what the trends are.

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Speaker 3: And to me, the trends show inflation coming down across

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Speaker 3: the board multiple months in a row. They show the

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Speaker 3: labor market cooling. What we want is for the labor

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Speaker 3: market to get into good balance, sort of the full

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Speaker 3: employment natural rate. If we're not stopping at that, and

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Speaker 3: then we're not neutral and we're going to have to

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Speaker 3: be thinking about the employment side of the mandate.

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Speaker 1: It's not just about the next cut, it's also about

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Speaker 1: the path forward from here. For the people that think

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Speaker 1: that you might get multiple even multiple half point right

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Speaker 1: cuts through September through November through December, what do you

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Speaker 1: tell them in terms of what you expect for the

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Speaker 1: entirety of the path going into next year.

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Speaker 3: Look, you know, I don't like tie in our hands

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Speaker 3: even for the next meeting, so I certainly don't want

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Speaker 3: to commit ourselves to what going to be the rate

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Speaker 3: path five to seven meetings from now. With all of

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Speaker 3: that said, just look at the statement of economic projections

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Speaker 3: and you can see that as a committee of the

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Speaker 3: individuals believe have believed that the conditions will be appropriate

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Speaker 3: to have multiple rate cuts with the unemployment getting into

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Speaker 3: better balance and with inflation coming down to target, but

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Speaker 3: even at a run rate that's a little higher than

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Speaker 3: what we've seen in the last couple of months. So

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Speaker 3: it's not any secret. The Fed's been pretty vocal about

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Speaker 3: here's what the reaction function is and expecting. As is

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Speaker 3: historically true, when conditions weren't a cut, they tend not

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Speaker 3: to be one individual cut. The SEP shows that the

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Speaker 3: median dot of the dot plot has multiple cuts over

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Speaker 3: the next year.

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Speaker 2: How weak is the US economy overall? I want to

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Speaker 2: point out something that your Governor JB. Pritsker, the governor

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Speaker 2: of Illinois, said just two days ago. Interest rates are

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Speaker 2: holding companies back from making the investments that are necessary.

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Speaker 2: All these companies are companies that are on a generally

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Speaker 2: upward trajectory over the last decade, but are having a

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Speaker 2: hard time in the moment because of some of the

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Speaker 2: challenges the Federal Reserve has brought.

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Speaker 3: I mean, in a way that's a description of monetary

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Speaker 3: policy that sounds like he's saying policy is restrictive, and

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Speaker 3: I agree with them. When the real federal funds rate,

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Speaker 3: that is the Fed funds rate minus inflation, that's as

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Speaker 3: high as it's been in a very long time. That's

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Speaker 3: the highest it's been over the cycle. As inflation comes down.

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Speaker 3: We set that rate a year ago at a time

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Speaker 3: when conditions were very different than they are now. And

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Speaker 3: you should be tightening by choice, not by accident. You

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Speaker 3: shouldn't back yourself into tightening. What we need to do

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Speaker 3: is take the through line on inflation and on employment,

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Speaker 3: and that's what should determine our policy. I don't want

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Speaker 3: to argue about the words how good or how weak

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Speaker 3: is the economy? Well, the numbers are the numbers. We've

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Speaker 3: seen GDP growing around trend. We had one weaker than

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Speaker 3: expected GDP growth number at the beginning of the year.

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Speaker 3: Then we had a stronger than expected in the second quarter,

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Speaker 3: and so we were growing, but it's slowing down. The

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Speaker 3: strongest thing in the economy has been the job market.

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Speaker 3: The weakest thing in the economy has been the inflation.

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Speaker 3: Both of those are converging back to let's call it

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Speaker 3: normal or what it was pre pandemic. And our absolute

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Speaker 3: goal now is we want to settle at something like

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Speaker 3: full employment, not blow through normal and deteriorate.

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Speaker 2: Well, I think the major thing that people want to

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Speaker 2: know going forward is now you mentioned all the data

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Speaker 2: coming up, what are you going to be looking at?

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Speaker 2: What is going to what are you going to base

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Speaker 2: your interest rate decisions on?

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Speaker 3: I mean, the dual mandate comes to us by law.

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Speaker 3: The law says the primary things we got to look

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Speaker 3: at are inflation and the job market and are we

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Speaker 3: maximizing employment? So those are going to be the big

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Speaker 3: two kahunahs as we go forward. But it is still

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Speaker 3: an economy with cross currents, where you've got some things

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Speaker 3: that remain quite strong by historical terms and other things

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Speaker 3: that have deteriorated. So if you look at credit card

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Speaker 3: delinquencies or small business defaults, those have been rising and

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Speaker 3: they have moved into what I call warning sign stage.

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Speaker 3: So I'm going to be looking at what Chair Powell

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Speaker 3: calls the totality of the data, not just the monthly

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Speaker 3: PCE inflation and jobs reports, but the PCE inflation and

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Speaker 3: the jobs reports are the big two for sure by law,

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Speaker 3: we do have to.

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Speaker 1: Leave it there. Wish we had more time, of course,

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Speaker 1: that is Bloomberg's Michael McKee and Chicago Fed President Austin Goolsby,

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Speaker 1: off the heels of a very highly watched and surprising

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Speaker 1: jobs report. We thank you both very much for your

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Speaker 1: time